Solo-k Asset Valuation Formality
(1) Whether a formal valuation is required will depend on the transactions that occur under the plan and the form of the plan.
A. For example, valuation in a single-participant plan may be less formal in a year in which the plan or self-directed account receives no contributions and makes no distribution or investment changes.
(2) The reasonableness of the method for valuing plan assets is based on the surrounding facts and circumstances.
Timing of Asset Valuation 401k Only
Rev. Ruler. 80-155 requires defined contribution plan assets to be revalued at least annually. If the requirements of Rev. Rule. 80-155 are not met, the plan is not rated.
(1) In a defined contribution plan, Rev. Rule. 80-155, 1980-1 CB 84, establishes that since the amounts assigned or distributed to a participant must be determinable, the plans must value their fiduciary investments-
(1) at least once a year,
(2) on a specific date,
(3) in accordance with a consistently followed and uniformly applied method.
When employer securities are acquired or sold, the securities must be valued at the time of the transaction.
Determining Asset Values 401k Only
Factors to Consider in Determining Value
(1) There are a number of factors to consider when determining the value of an asset, for example:
A. Nature and history of the business issuing the security
b. General Economic Outlook and Outlook for the Specific Industry
against Book value of the securities and the financial situation of the business
d. The company’s earning capacity
my. Dividend paying capacity of the company
F. value of goodwill
gram. recent stock sales
(2) ERISA 3(18) applies for the purposes of some exemptions from transactions prohibited by both ERISA and the Code.
(3) ERISA 3(18) defines the term adequate consideration for “assets other than securities for which there is a generally recognized market” as the fair market value of the asset determined in good faith by the trustee or trustee appointed pursuant to the terms of the plan
(4) Reg. DOL. 2510.3-18(b)(2) defines “fair market value” as the price at which an asset would change hands between a willing buyer and a willing seller when neither party is obligated to participate in the transaction.
(5) rev. Ruler. 59-60, 1959-1 CB 237, provides guidance in determining the value of plan assets. Although Rev. Rule. 59-60 provides methods for valuing shares of closely held corporations for inheritance and gift tax purposes, the factors can be used to determine asset values in qualified plans.
A. Factors in Rev. Rule. 59-60 are not a restricted list of factors for valuing privately owned employer securities. Other factors may be included when appropriate. Additionally, not all of the factors listed will be relevant to all businesses and transactions.
(6) The detail of the valuation of the asset is examined in light of the plan assets involved.
A. As an example, the valuation should contain extensive detail if you are valuing a limited partnership interest or a closely held corporation.
(7) If applicable, share values must be discounted for lack of marketability and, if applicable, a control premium must be added to the share value.
Types of Plan Assets
(1) Plans may invest a portion of their assets in limited partnerships and invest directly in real property or in mortgages on real property.
(2) Plans may also invest in life insurance contracts. The following describes a safe harbor that can be used when distributing such contracts.
Associations
(1) The company itself can invest in practically any type of asset.
(2) Generally, limited partnership interests are not listed on national stock exchanges.
(3) The assessment of a plan’s interest in a partnership is especially important in a year in which the plan is making a distribution.
real estate
(1) Mortgages valued at cost may be incorrectly valued if based solely on the purchase price of the real property.
(2) The valuation of the mortgage must reflect the current value of the real property.
A. For example, if the fair market value of the investment property held by the plan is less than the debt secured by the property, the value of the mortgage must be reduced. Also, the value of the mortgage is based on the balance of the loan.
Life Insurance Contracts
(1) Section 1.402(a)-1(a)(1)(iii) of the Income Tax Regulations provides, in general, that the beneficiary takes into account a distribution of property through a qualified plan in his ” fair market”. worth”.
A. In the case of a non-variable life insurance contract, compare the premiums paid with the value of the contract. Generally, the value of a non-variable life insurance contract should be close to the premiums paid under the contract accrued at a reasonable interest rate (at least 2 or 3 percent) less the reasonable cost of insurance charges (usually , except for very high ages). less than $5,000 per $1 million death benefit) less reasonable policy expenses (generally less than $1,000 per $1 million death benefit).
b. In the case of a variable life insurance contract, the actual return on investment must be considered. In general, the value of a variable life insurance contract should be close to the premiums paid under the contract accumulated at the rate of return on the actual investment earned by the contract (which can vary widely because the premiums paid under such contracts are generally invested in mutual fund-like instruments ) less reasonable cost of insurance charges (generally, except for very high ages, less than $5,000 per $1 million death benefit) less reasonable policy expenses (generally, less than $2,000 per $1 million death benefit).
(2) If assets are valued more frequently than annually in a manner that favors distributions to highly compensated employees, prohibited discrimination could occur.
(3) An improper valuation of qualified plan assets may cause a plan to exceed benefit and contribution limitations.
A. This could occur, for example, if there was an exempt contribution from undervalued property to a plan and the resulting annual additions to participants’ accounts based on the incorrect valuation are within the limits of IRC 415, but the annual additions based on in the fair market value of the contributed property would exceed the IRC 415 limits.
b. Similarly, there could be excess annual additions if the plan were to sell the property for more than fair market value.
(4) In extreme cases, an exclusive benefit violation may occur under IRC 401(a)(2) if a qualified plan enters into a prohibited transaction in which it acquires property for more than fair market value.
Prohibited Transactions
(1) Pursuant to IRC 4975(d)(13) and ERISA 408(e), a plan may acquire and hold qualified employer securities and qualified employer real property.
(2) The acquisition of qualified employer securities or qualified employer real property is exempt under IRC 4975(d)(13), only if the securities or real property are sold or acquired for “adequate consideration” as defined in ERISA 3(18) . This requires a proper assessment.
